Underpinned by strong global demand for solar due to green initiatives, the world’s biggest solar company – LONGi Green Energy (SSE:601012) – is primed for a long runway of growth.
- LONGi Green Energy (SSE:601012) is the world’s largest manufacturer of solar wafers and modules, which are products in the solar photovoltaic (PV) manufacturing value chain.
- The company is a prime beneficiary of the long-term growth in the global solar PV market. Demand for solar remains strong due to green initiatives driven by Asia, the US, and the EU.
- What sets LONGi apart from competitors is its strong profitability. We expect the company to maintain its cost leadership position due to its cutting-edge technology as well as large production scale.
- Our target price for LONGi is CNY 130, derived based on a 38X fair PE ratio to the estimated 2023 earnings per share. This translates into an upside potential of 41% as of 22 November 2021.
Behind China’s rising dominance in the global solar market lies LONGi Green Energy (SSE:601012), the largest solar company in the world. Over the past decade, LONGi’s revenue has grown by more than 30 times, from CNY 1.7 billion in 2010 to CNY 54.6 billion in 2020.
Understanding how solar panels are made
Currently, most solar panels are made using either the crystalline silicon technology or the thin film technology. The former is the dominant technology used in the solar photovoltaic (PV) industry due to its higher efficiency.
As the world’s largest solar market, China also controls the majority of the global solar PV manufacturing value chain. This is particularly true in the manufacturing of wafers, where 96% of the supply comes from China.
Figure 1: Solar PV value chain based on crystalline silicon technology
The value chain of solar PV based on the crystalline silicon technology starts with the processing of quartz sand, which is further purified to produce a material called polysilicon. Polysilicon is melted in furnaces to form silicon ingots through a crystallisation process. Afterwards, the silicon ingots are cut into silicon wafers. Through multiple processes such as doping and coating, silicon wafers are manufactured into solar cells. Finally, the solar cells are electrically interconnected and laminated to form solar modules (i.e. solar panels).
LONGi: The world’s largest manufacturer of solar wafers and modules
While there are many solar companies, LONGi dominates the industry like no one else. The majority of LONGi’s revenue is generated from solar wafers and modules (Figure 2). The company uses the monocrystalline silicon (mono-Si) technology, which produces solar wafers and modules of the highest efficiency. In FY2020, LONGi had ranked first globally based on the shipments of mono wafers and modules, with a market share of 46% and 19% respectively.
Figure 2: Wafers and modules make up majority of revenue
With the rising global demand for solar PV, LONGi has been exporting its products to different regions including Asia, North America, and Europe. China remains the biggest market, accounting for 61% of revenue in FY2020.
Besides its dominant market position, LONGi is also known for being the first Chinese company to implement the diamond wire cutting technique. This technology has helped reduce the production cost of its wafers significantly, by -20% in 2015 and another -23% in 2016 (Figure 3).
Figure 3: The production cost of wafer
A beneficiary of the burgeoning global solar PV market
The supply chain crunch stemming from a near-term shortage of polysilicon has caused solar companies like LONGi to ask customers to delay purchases. Nonetheless, we believe that the sun will continue to shine on LONGi as the medium to longer term growth of solar PV remains intact.
As the world’s largest emitter of greenhouse gas, China’s clean energy transition could make waves for the global renewable energy sector. Solar plays an important role in its plan to reach peak carbon emissions by 2030 and carbon neutrality by 2060.
Based on data obtained from Bloomberg New Energy Finance (NEF), China is estimated to contribute the majority of the world’s newly installed solar capacity in the next ten years. Developers in China have been asked to accelerate the construction of solar projects, while local governments and grid companies have been asked to guarantee the grid connection of solar power.
Elsewhere in Asia, Vietnam and India are also expected to be strong drivers of solar PV demand. Vietnam’s draft power development plan (PDP8) has proposed to add an ambitious 19GW of solar capacity by 2030. Meanwhile, India is set to triple its total installed capacity of renewable energy within the same period, with solar playing an instrumental role.
Let’s not forget about the US and the EU, who have laid out plans on how solar can help to achieve carbon neutrality. The total installed capacity of solar in the US is expected to quadruple by 2030, while that in the EU could double in the same period.
Overall, the newly installed capacity of solar PV is set to surpass 300GW globally in 2030. This represents a 10-year compound annual growth rate (CAGR) of 8%. We believe this will fuel strong demand for LONGi’s products such as solar wafers and modules.
Figure 4: Installed capacity of solar PV will be boosted
Superior margins underpinned by technology and scale
What sets LONGi apart from competitors is its strong profitability. LONGi has delivered industry-leading margins ever since it implemented the diamond wire cutting technique, which significantly reduced cost in 2015 (Figure 5). Looking ahead, we believe LONGi can maintain its cost leadership position due to its cutting-edge technology as well as large production scale.
Figure 5: Margins of leading solar companies
Thanks to research and development (R&D), LONGi has been building up its technological capabilities that help to enable profitability. For instance, the company has continued to lead industrial breakthroughs with the launch of cells that use the tunnel oxide passivated contact (TOPCon) technology. The TOPCon technology enables the production of highly efficient crystalline solar cells at a low cost. LONGi’s new TOPCon solar cells has achieved a power conversion efficiency rating of 25.19% in July 2021, which is reportedly a world record.
Additionally, we expect LONGi’s capacity expansion to generate greater economies of scale. Its production capacity of wafers is expected to increase by 48%, from 62GW in 2020 to 92GW by the end of this year (Figure 6). Cost reduction from this capacity expansion could help to mitigate the negative impact of the near-term surge polysilicon cost and boost profitability in the longer term.
Figure 6: Production capacity of wafers will expand
Key investment risks
Trade sanctions: The US has launched a crackdown on Chinese solar products that are allegedly linked to “forced labour” in China’s autonomous Xinjiang region. As of 3 November 2021, the US has detained 40.31MW of modules exported by LONGi, accounting for only 1.59% of its export sales to the US in 2020. While the current impact on LONGi’s operations is insignificant, LONGi could be exposed to more import restrictions so long as the crackdown continues.
Nonetheless, we note that LONGi is not overly reliant on the US for sales. China is the main source of revenue for LONGi, and rising tensions with the US has also prompted the company to increase diversification into other geographical markets.
Weaker-than-expected demand and margin: The price of polysilicon is expected to soften in 2022 following capacity expansion. However, if the supply shortage extends beyond expectations, solar PV demand would continue to be curbed. LONGi’s profitability could also be affected as further price hikes in order pass through the rise in costs to customers may not be sustainable.
Strong upside potential of 41%
While the competition in China’s solar market is fierce, companies like LONGi, which places a strong emphasis on R&D, will continue to stay relevant. Moreover, LONGi’s outstanding balance sheet provides it with robust financial flexibility to increase R&D spending (Table 1).
Table 1: LONGi has a much better net debt-to-equity ratio as compared to peers
|Company||Net debt-to-equity ratio|
|Source: Bloomberg Finance L.P.Data as of 30 September 2021|
Despite having a stronger balance sheet and superior margins, LONGi is trading at a 2023E PE of 27.1X, lower than its peers who are also listed on the onshore Chinese market (Table 2).
Table 2: Peer comparison
|Company||Market Cap (CNY billions)||2023E PE (X)|
|LONGi Green Energy (SSE:601012)||499.0||27.1|
|Tianjin Zhonghuan (SZSE:002129)||151.9||27.4|
|JA Solar (SZSE:002459)||162.6||36.1|
|*Listed on STAR MarketSource: Bloomberg Finance L.P.Data as of 22 November 2021|
Our target price for LONGi is CNY 130, derived based on a 38X fair PE ratio to the estimated 2023 earnings per share. This translates into an upside potential of 41% based on the last traded price of CNY 92.18 on 22 November 2021.
Our fair PE ratio for LONGi is higher than that of the sector. We believe this is justified due to LONGi’s leading position in the global solar market and its ability to generate industry-leading margins, which will translate into strong earnings growth.
Overall, as LONGi continues to develop its scale and technology, we expect it to remain as a leader in the global solar market. With strong demand for solar due to green initiatives driven by China and other markets, the company is positioned for a long runway of growth.
Alternatively, investors who prefer a diversified approach can consider the Global X China Clean Energy ETF (HKEX:2809) which has 7.61% exposure to LONGi as of 19 November 2021.
Table 3: Earnings growth
|Source: Bloomberg Finance L.P., iFAST EstimatesData as of 22 November 2021|